Mortgage changes keep new buyers on sidelines in April, but not much longer

TORONTO – Climbing home prices and tighter mortgage rules closed doors for new homebuyers in April, but those “linchpin” buyers won’t remain on the sidelines as their financial outlooks improve,  economists say.

New mortgage rules that took effect midway through March sidelined a number of first-time homebuyers last month and encouraged others to move purchases into the opening months of the year, said Gregory Klump, chief economist at the Canadian Real Estate Association.

Home sales are likely to drop off in the next two quarters from an accelerated pace in the first-quarter due to that “pull forward” effect, Klump said.

But improving economic conditions, including expected job and income growth over the next several months, along with a sustained low interest rate environment, should encourage more first-time homebuyers and support a healthy market this year, Klump said.

“First-time homebuyers are the linchpin of the market,” he said, explaining that without first-time buyers there would be no demand for lower end houses, making it hard for homeowners to sell and upgrade.

“Do I expect first-time homebuyers to remain sidelined over the rest of the year? No, I don’t. I expect hiring to continue and interest rates to be quite supportive of Canadian housing.”

The new mortgage restrictions cut the longest possible amortization period to 30 years from 35 years in a move to curb high-risk borrowing. However, it also forced some potential buyers out of the market who couldn’t afford the higher monthly payments for the shorter period.

The phenomenon helped to skew the national average home price eight per cent higher in April and contributed to a 14.7 per cent decline in sales from the year before, according to data released Tuesday by CREA, which represents some 100,000 Realtors across Canada.

The total number of homes sold on CREA’s Multiple Listing Service in April fell to 44,356 from 51,975 a year ago. On a seasonally adjusted basis, sales were down 4.4. per cent from March of this year.

Canada’s average home price rose by eight per cent to $372,544 compared with $345,104 last April _ the third consecutive month in which the national average price rose by eight per cent from year ago levels.

“(The) new mortgage rules affect sales in the lower end more so than in the higher end of the market,” Klump said.

“If you take first-time homebuyers out of the market, you’re reducing the proportion of sales in the lower price ranges… and that too will pitch up the national average (price).”

A boom in sales of multimillion-dollar properties, largely in the Greater Vancouver area, has been skewing the average home price upward in recent months. Average home prices in British Columbia were up 16 per cent, double the national average _ sending the country-wide average higher.

While demand for lower-priced properties fell during the month, higher-end home sales in Greater Vancouver and Toronto had their best April ever, helping to keep the national average price high, Klump said.

In Vancouver, average home prices were $879,039 last month. In Toronto, they were up to $477,407.

Listings were down 15 per cent year-over-year, another big reason why prices remained lofty despite moderating sales activity in April, said BMO Capital Markets economist Robert Kavcic.

“This is especially true in pricier markets like Toronto (-29.9 per cent year-over-year) and Vancouver (-23.4 per cent year-over-year),” he said.

The number of newly listed homes edged up 1.3 per cent in April from March, but remained well below levels in January and February, when the coming mortgage rule changes were announced.

The new rules had already left a mark on existing home sales during the previous quarter as home sales surged to their highest level in a year as buyers rushed in to beat the tougher restrictions, said Leslie Preston, an economic analyst at TD Economics.

“We don’t expect the first quarter’s pace to be sustained (through the rest of the year) and April’s reading sets the stage for an expected softening,” she said.

That said, decent employment and income gains and a still-low interest rate environment continue to provide a relatively favourable backdrop for home sales, and so we expect Canada’s housing market to land softly.“

Meanwhile, similar government moves last spring that made it harder to qualify for a mortgage also gave sales a boost in April 2010 that amplified the year-over-year decline even further. Last year, the impending HST in B.C. and Ontario and speculation about higher interest rates also pushed sales higher in April.

Klump said that additional measures to tighten mortgage rules and other factors made it difficult to compare the latest results to a year earlier and reliably gauge the impact of the mortgage rule changes.

Year-over-year comparisons should become less pronounced in the coming months, as last year’s sales dipped 17 per cent in May and June,  Kavcic said.

“Canada’s housing market appears well balanced overall, with the ratio of sales to new listings bang on its long-run average, though some local markets are clearly hotter than others,” he said.

“Higher mortgage rates and now stricter mortgage rules should keep sales and prices well behaved in the year ahead.”

CREA said that the increases in newly-listed homes combined with fewer sales in April helped push more than two-thirds of local markets into balanced territory.

The national sales-to-new listings ratio, a measure of market balance, stood at 52.5 per cent in April, down from 55.7 in March.

The number of months it would take to sell all of the listings on the MLS, another measure of supply and demand, was up to six months in April, up from 5.7 months in March.

Housing starts _ another key indicator of demand for homes _ were slower than expected in April, largely due to a decline in construction on multi-unit buildings such as apartments and condos. That was much weaker than economists had been expecting, as construction activity usually picks up in the spring.

A drop in housing starts and sales of previously occupied homes had been widely anticipated. However, the expected drop in home sales across Canada this year will be less than previously forecast because of stronger sales of mega-homes in British Columbia in the first quarter, the Canadian Real Estate Association said earlier this month.

CREA now expects that unit sales for 2011 will dip 1.3 per cent to 441,100, less than the 1.6 per cent decline it forecast in February.

National sales activity of homes sold on CREA’s Multiple Listing Services should rebound by 2.6 per cent to 452,000 units in 2012, it added. That’s in line with the previous forecast and the 10-year average for annual activity.

The national average home price is forecast to rise four per cent in 2011 to $352,500 and by 0.9 per cent to $355,800 in 2012.